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Twitter IPO: How the company became an unlikely darling

By Peter Delevett and Brandon Bailey, San Jose Mercury News

Updated:
09/16/2013 04:39:24 PM EDT

The microblogging site announced plans for a public initial public offering via a tweet - very fitting - last Thursday. Estimates of Twitter's market value range as high as $15 billion - more than fabled brands such as Porsche, Marriot and Xerox. (KIMIHIRO HOSHINO)

It began as a side project at a floundering dot-com. Its chief executive is a failed improv comic. And for years, even its most ardent backers struggled to understand how it would make money.

Now, microblogging site Twitter is poised for the tech industry's next "IPO of the Century."

An unlikely turn of events, to say the least.

"There was a period of time when I thought of it as a novelty at best," said Jake Sorofman, a Gartner analyst who focuses on digital marketing.

He described Twitter in its early days as a service to "document the mundane" -- the killer burrito you just ate, for instance.

While there's still plenty of flotsam in the Twittersphere these days, there is no denying the site's growth into a global phenomenon. Its 200 million monthly users have broadcast real-time updates on everything from the devastating 2011 tsunami in Japan to the raid that killed Osama bin Laden, often leaving TV networks scrambling to catch up.

Although details of the company's initial public offering plans, announced Thursday via (what else?) a tweet, remain shrouded, estimates of Twitter's market value range as high as $15 billion -- more than such fabled brands as Porsche, Marriott and Xerox.

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Because the company used new federal rules that permit IPO filings to remain secret while they're readied for investors, it's not yet known how much money Twitter wants to raise, how much its business generates or even when the stock offering might take place. But research firm eMarketer projects that the company's ad sales could hit $1 billion next year -- more than triple what it's thought to have made last year.

Not bad for an idea cooked up on a lark by some Midwestern kids.

Jack Dorsey was just 29 when he and a few co-workers at struggling San Francisco podcasting service Odeo started noodling in early 2006 on a better way to communicate with one another about work. They came up with an instant group-messaging app called twttr and capped "tweets" at 140 characters -- ideal for the slow and creaky SMS text-messaging networks of that pre-smartphone era.

Despite its limitations, the app took off in popularity once Odeo insiders released it to their friends. Evan Williams, who had founded the startup after selling Blogger.com to Google for a small fortune, saw the potential and bought out Odeo's investors, bringing Twitter into a new company he called Obvious Corp.

But even with millions of dollars in venture funding, it was anything but obvious that Twitter -- the name was chosen to convey "a short burst of information" akin to bird chirps -- would succeed. Williams forced Dorsey out as CEO, and the company was torn by debate over whether to try to make money from the product for fear it would turn off users.

Adult supervision finally was called in: Dick Costolo, who had made his own Google millions when the search giant bought his startup, Feedburner. He joined Twitter in fall 2009 as chief operating officer, and within months, the company announced it would start letting advertisers put "promoted tweets" in front of users.

"He understands both the business and the technology and can knit the two together," said venture capitalist Greg Sands, an early investor in Feedburner.

With his compact frame, chrome dome and heavy glasses, Costolo resembles TV bandleader Paul Shaffer. Though he'd studied computer science at the University of Michigan, Costolo fell in love with improv comedy but eventually returned to tech after one too many failed auditions.

"There's an intense, driven, hardworking person underneath that warm and cuddly user interface," Sands said of Costolo, who turned 50 two days before Twitter announced its IPO filing. Sands praised Costolo's ability to focus on what's essential and to ask tough questions of his board and staff.

Twitter has shot from 60 employees when Costolo joined to more than 2,000 -- such a rapid pace that San Francisco Mayor Ed Lee in 2011 cut a controversial tax deal to keep the company in town. Twitter now occupies a sprawling headquarters that city officials hope will revive a gritty stretch of Market Street.

Besides adding to the rank and file (and bringing back Dorsey in an advisory role), Costolo has recruited top executives from the likes of Google, eBay and Palm to make the crash-prone site more reliable.

"They stopped having so many outages and down time, and that makes a big impression" on investors, said David Rogers, who teaches digital marketing strategy at Columbia Business School in New York.

Other key hires came on the revenue side. Chief Financial Officer Mike Gupta, who helped take Zynga public in 2011, joined Twitter last year and will shepherd the company's IPO. More recently, Costolo hired a former TicketMaster CEO to develop new e-commerce programs in which advertisers might sell goods or services to users who click on sponsored tweets.

While some analysts have wondered why Twitter, which has stockpiled hundreds of millions of venture capital dollars, would opt for the headaches of going public at this point, an IPO will deliver cash for acquisitions such as last week's purchase of mobile ad service MoPub. Costolo spent a reported $350 million on the company, which helps advertisers bid in computerized auctions to place their messages on Twitter and other mobile apps.

eMarketer estimates that more than half of Twitter's revenue will come from mobile advertising, which analysts call a healthy sign. The MoPub deal, they say, could be a first step toward building a broader advertising network like Google's.

Rebecca Lieb, a social media expert at Altimeter Group, said Twitter also may benefit from Facebook's success over the past year. When the Menlo Park company went public in 2012, she explained, "the market at large really didn't understand social media advertising to the extent that I think the industry does now, largely due to the fact that Facebook paved the way."

Even so, Lieb said, Twitter faces a challenge in winning over more marketers because of its unique form of advertising. Sponsored tweets can't be reused on other sites and can become outdated within hours.

"Twitter demands a high level of thought and customization" of ads, she said.

But Sorofman, the Gartner analyst, said Twitter "very wisely" has made itself more appealing to advertisers by partnering with celebrities and media companies, adding hashtags to let people find other users with common interests; and creating a mobile app that users can browse while waiting in line.

"They turned it from a toy to a tool," he said of the service, "and now a platform and an ecosystem."

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